HKDF newsletter - 21 - Government by Businessmen: Hong Kong’s Dilemma

But Smith was also an acute observer of human behaviour who couched his economic theory in a moral context. So let me read you three quotes from Smith and see how they fit with current concepts of business-friendly government in Hong Kong.

The problem of setting out to be "business friendly" is that the question is seldom asked: Whose business?

Unlike Marx, Smith did not think in terms of a conflict between capital and labour. But by the same token he did not think of business as a class to be accorded advantage. His goal was the common weal - everybody's business.

Even with a narrower definition of business - people who are self-employed or employ others the question of defining "Whose business interest" is difficult. That is especially apparent in an economy such as Hong Kong which has an unusually large number of small businesses. Though some have direct representation on the Legislative Council, they are too numerous and diverse to have much political voice.

Korea now has a competition policy. But Hong Kong? It does nothing, pretending that to do nothing is laissez faire.

There is also an unusually small number of large-scale businesses. Most of the latter are in practice, if not in name, conglomerates encompassing several key activities. Because they are small in number they find it easy to have the ear of a government which barely pretends to be representative.

Hong Kong is also unusual because it has a large number of foreign businesses. Necessarily these are not significantly represented through the political process - feeble though that process is at the best of times. I am not suggesting that they ought to be. But clearly foreign business has an interest in low operating costs as well as low taxation, and in maximum opportunity to compete on a level playing field with local businesses. Are its interests being sacrificed to local vested interests?

In practice the "business friendly" government accords secondary status to the interests of the foreign businessmen who created Hong Kong as a trading centre and remain the most important factor which differentiates Hong Kong from Shanghai or Guangzhou.

But back to Adam Smith. In practice how does Hong Kong measure up against the three above quotes.

Firstly, Smith identified the pre-eminence of the consumer - which is interesting given the assumption often made that savings and investment are good but consumption is not. But what do we find in Hong Kong? The Consumer Council is a worthy but toothless body which makes recommendations which are mostly ignored. The consequences of ignoring consumer interests is apparent not just to consumers but to any observation of the current parlous state of the economy. Although some prices have fallen in the past few years due to the end of the property bubble and the strong dollar, they have clearly not fallen far enough to revive consumption at the expense of savings.

Why is this? There are several reasons. But one reason is clear: the refusal of the government to countenance any kind of realistic competition policy. The US has had its anti-trust law for decades. It is widely seen as a major contributor to innovation and competition. Europe has competition rules. Australia's success in recent years has been partly attributed to a very vigorous competition policy which has kept down prices and spurred productivity. Korea now has a competition policy. But Hong Kong? It does nothing, pretending that to do nothing is laissez faire.

In many countries the behaviour of some of Hong Kong's leading businesses would be criminal offences.

In practice the government has become a silent partner in the plot to "widen the market and narrow the competition" - to quote Smith.

Conspiracy to raise prices against the public interest is a natural objective of businessmen. Price competition is uncomfortable. The closer the government - which exists to maintain law and a level playing field - comes to such businessmen, the greater the danger that their sectional interests will dominate at public expense.

The chaebol-like structures have an especially inhibitive impact on Hong Kong. It is bad enough that there is a supermarket duopoly - two firms which have proved incapable of competing overseas. It is far worse that the attempt of one of the most efficient global firms, Carrefour, was forced to withdraw because of what amounted to a conspiracy by local interests to deprive it of prime sites and by suppliers with monopolies protected by laws against parallel imports. In many countries the behaviour of some of Hong Kong's leading businesses would be criminal offences.

It's perhaps worth reminding ourselves how much the domestic economy is in the hands of oligopolies, formal or informal. There is the power duopoly resulting in excess capacity, zero price competition, high prices and assured return on capital. There is the port situation, whereby existing operators campaign against local expansion but expand on the mainland, thus protecting high margins here while finding growth elsewhere.

Perhaps it is not surprising if Tung Chee-hwa is in favour of "business-friendly" environment for cartels. After all the container shipping business in which his family firm OOCL operates is the most cartelised global industry. Indeed in the 1990s, when CH Tung was chairman it was fined by the European Commission for price fixing.

Then there is Cathay Pacific whose interests are limiting Hong Kong's hub role. (Where do you buy your tickets? I live in Hong Kong but arrange for most of my long distance travel to start in Bangkok, London or Sydney. Indeed, almost anywhere but Hong Kong.)

I won't bore you with a long lecture on the property cartel. Its depredations are notorious. But it is worth noting not just the cartel-like behaviour of the big developers but the unnatural linkages between them and the banks. The difference between mortgages available on new as compared with, say, 15-year-old flats is a disgraceful mutual back-scratching exercise which has nothing to do with sound banking and a lot to do with corporate cronyism.

If that's possible, developers seems to have become even more influential since 1997. The proximity of government figures to one or two developers in particular has meant that being friendly to this business has taken precedence over most others as the twists and turns in public housing, land sales and tax policy indicate.

The proximity of Mr Li Ka-shing and family is clearly in a class of its own. Cyberport was a particularly egregious example of cronyism which has done Hong Kong immense damage. But there have been plenty of others: The waivers of GEM rules for Tom.com allowing all kinds of insiders to reap huge profits from a pie in the sky scheme. Then there was PCCW which was another example of how shares could be boosted to give huge profits to the insiders, and land huge losses on almost the whole of the rest of the Hong Kong investing public, and the government itself which agreed to take PCCW's dubious paper in return for its Cable & Wireless stake. Now Mr Li's latest successful effort to extract cash from the public: CK Life Sciences.

The linkages between established businesses, anxious to protect their positions, and the government are much greater than is usually acknowledged - and have been getting closer. I don't whether anyone has kept an account of the number of middle to upper level bureaucrats who have moved into the private sector, whether before or after retirement. In theory such cross fertilisation might sound beneficial to both. In practice, how much of it has been payment for services previously rendered? To land or buildings officials for generous interpretations of plot ratios or development guidelines? To policemen or fire officers for providing special services. This is an old problem but badly needs to be addressed.

More recently a different link between government and private sector has been established: management of quasi-public enterprises. Most notorious was the shift of a senior bureaucrat to an even bigger salary as chief executive of Hong Kong Exchanges and Clearing. This company is itself a monopoly which has done scant good to Hong Kong's financial services sector by maintaining minimum commissions and making a miserable job of policing listed companies and new listings. Of course, the policing job ought to be in the hands of the SFC but it doesn't seem too keen to take on a job which if done well would make it unpopular with the business figures who have grown richer than ever by abusing minority shareholders' rights. The SFC itself is in the hands of a bureaucrat who apparently did not see anything inappropriate in contributing to Tung Chee-hwa's re-election campaign. So much for politically independent civil servants.

Likewise we find other quango jobs taken up by members of the business elite. Michael Tien at the KCR. Peter Woo at the Trade Development Council, K.S. Lo at the Hospital Authority - after presiding over the disgraceful GEM rule waivers which enriched cronies of the elite at the expense of the public. I am not criticising these people personally. Some are very competent. However, they are testimony to the ever closer links between government and established, locally oriented big business. The offspring of entrepreneurs who built Hong Kong's shipping and textile empires may be well educated but they are not necessarily good businessmen and their entry into government jobs is stifling the rise of new talent. The bureaucracy has in the past been an effective ladder for talented people from modest backgrounds.

Now with the so-called responsibility system with ministers and a few Legco members in Exco we have yet another shift of power towards the interests of established business groups. They may not be bureaucrats but the newcomers, capable or not, hardly represent new blood. Again we find sons of entrepreneurs, scions of famous families, and of course a graduate (really!) from the PCCW business school.

Given the enormous expansion of the professional middle class over the past 20 years, the pool of educated talent is now quite large. But this class is not only deprived of political power but is being kept out of senior jobs by cronies.

This is all the more alarming when the government seems to want to do more not less to use public money to spur new industries. On top of the outrageous government subsidisation of Cyberport and Disney, and the construction of buildings to house favoured supposedly high tech industries there is now talk of yet more intervention on Singapore lines.

Singapore has been a success - but in fact less so than Hong Kong if measured by GDP growth since 1959 - the year Lee Kuan Yew came to power.

For both historical and local political reasons, Singapore's development diverged from that of Hong Kong. It did not have Shanghainese factory owners to create industries. Lee Kuan Yew anyway distrusted business people, preferring a Confucian elite of highly educated and politically trustworthy people to run the country under his leadership.

So Singapore turned on the one hand to foreign companies, who were given huge tax breaks, and to newly created government enterprises. The latter didn't just go where private capital dared not tread. They went into areas like banking where local capital was already well established. To this day, local capital in Singapore is disadvantaged vis-à-vis state capital, with cheap money and government ministries behind it, and foreign capital which continues to be attracted by tax concessions. Local private capital - not to mention the man in the street who get almost zero return from the CPF - has been a huge loser in Singapore. Is that what Hong Kong wants? It may get it if politics and government relationships drive future business even more than in the past.

I would not want to suggest that things are worse in Hong Kong because of the 1997 handover. Even Li Ka-shing may have no more power than Jardines or the Hong Kong Bank had in the past. But we have to recognise that the situation has changed. The colonial system involved a balance, often uneasy, between colonial bureaucrats and local business interests, whether foreign or locally owned. It had always been thus. My own relative, 1850s governor Sir John Bowring, who believed in education and local representative was at constant loggerheads with the Jardines and Mathesons. The colonial business community viewed him as a dangerous radical.

But I digress. The colonial bureaucracy was self-renewing. Once they reached retirement age (55 or 60) they were required to go home to UK, or wherever. Philip Haddon-Cave was very insistent on the importance of this principal. Unfortunately David Akers-Jones hung around trying to be influential - and reminding his critics of his career in the New Territories. Meanwhile local bureaucrats were chosen by exam not family connections.

The system meant that there was a real personnel disconnect between bureaucracy and business. Business interests may have had the upper hand much of the time, but there was often a healthy tension.

The past five years has shown that the lack of democracy in Hong Kong has enabled the rapid growth of unhealthy links between government and an unelected, undynamic, quasi-hereditary business elite.

I am not a believer in democracy for its own sake. It can on occasion lead to tyranny or rampant corruption as quickly as other systems. But the past five years has shown that the lack of democracy in Hong Kong has enabled the rapid growth of unhealthy links between government and an unelected, undynamic, quasi-hereditary business elite.

Korea renewed itself by a democracy-based crushing of the chaebol, the rise of middle class power, of expertise over government linkages and inherited wealth. Taiwan's democratisation saw the end not only of the KMT political system but the withering of its business conglomerates, overtaken by the new entrepreneurs who brought Silicon Valley attitudes as well as technological prowess.

And what does Hong Kong now have? A government led by a man who seems to think that business should be run on Confucian lines of order, hierarchy, loyalty to state and family. Mr Tung may be a good Confucian. But Confucius did not live in an era of capitalism and entrepreneurship. Government is about law, order, continuity, honesty, the protection of the weak against the powerful, rule based processes. Successful and dynamic business is about creation, destruction, opportunism, self-interest, risk taking, relations-based processes.

Business-friendly government in practice has become an invitation to additional sleaze, cronyism, hereditary values, cartels, stock market scams and officially sanctioned rip-off of the general public. Worst of all, it is economically inefficient.